Euro benchmark issuance is on track to hit the €120bn average forecast for full-year supply after January volumes, at close to €28bn, were more than double those of 2021, and February activity is expected to be more reflective of pre-Covid days even if the month has started slowly.

Although only one euro benchmark was launched between 21 January and the end of last month, issuance reached €27.75bn, compared with €12.75bn (€14bn) in January 2021, as supply recovered towards the pre-Covid level of January 2020, when some €28.25bn hit the market.

“This gives us hope that our 2022 issue forecast of €125bn will be achievable,” said LBBW analysts.

January’s issuance is equivalent to 22% of LBBW’s forecast and investment analyst Carl Sattler noted that this is in line with the average 21.26% share of full-year supply that the first month of the year has accounted for in the past decade.

February supply has on average accounted for 8.67% of full-year volumes and an average €120bn forecast for 2022 supply would imply issuance of around €10.5bn this month – of which €750m has been issued so far.

Gross and net euro benchmark covered bond supply

Source: HSBC, Bloomberg

Analysts at LBBW and elsewhere indeed expect lower primary market activity this month – albeit higher than February 2021’s measly €1.75bn – with blackout periods already contributing to the subdued primary market.

“Because of the reporting season, supply should be lower than January, but busier than last year’s February and approaching normal levels again,” said DZ analyst Verena Kaiser. “January has shown that in spite of geopolitical risks, Corona risks, and some other risks that are now appearing, this market has shown that it’s a safe haven.”

Redemptions sharply down on last month’s €33.4bn are cited as another factor in the modest expectations the month.

“Redemption flows will be significantly less supportive in February,” said ING analysts, “with only €8.3bn falling due this month across a mixture of countries (UK, Spain, Ireland, Germany, France, Denmark and Austria).”

And despite January’s issuance rebound, net remained negative at minus €5.3bn, they noted.

Maureen Schuller, head of financials sector strategy at ING, nevertheless highlighted that covered bonds strongly led euro primary issuance from banks in January, with preferred senior supply at close to €12bn, bail-in senior supply nearly €13bn, and subordinated issuance just €1bn as of the middle of last week.

“Hence, covered bond supply is even higher than the full non-covered euro print of banks on a year-to-date basis,” she said.

Canadian issuers contributed a quarter of the new year euro benchmark supply, with four deals totalling €7bn, including a €2.75bn Bank of Montreal five year that is the biggest euro benchmark since 2006. This has led NordLB analysts to raise their full-year euro forecast for the jurisdiction from €9bn to €14bn, although they warned that forecasting uncertainty remains high.

“Theoretically, this could result in a marked restraint on funding over the course of the year,” they said. “The fact that we were more surprised by the size of the bonds placed in 2022 than by their cumulative appearance also complicates the outlook for the rest of the year.”

Although the backdrop of rising inflation and rates made issuance at the long end of the curve increasingly challenging as January wore on, higher yields contributed to the strong demand encountered by Canadian and other issuers in the short to intermediate part of the curve.

However, Scope analysts are sceptical about the extent to which such trends are helping the covered bond market prove more appealing.

“It is a myth that 2022 will be the year in which covered bonds regain relevance for long term investors other than central banks or bank treasuries,” they said. “The dire situation of low supply and low attraction to covered bonds by real money investors remains. Barely positive yields plus not-so-transitory inflation results in negative real rates.

“Covered bond supply will be held back because very high excess deposits,” they added, “and non-preferred funding targets allow lending growth to be easily absorbed at attractive rates.”